Explaining Cash Back Mortgages
There is a terrific tool on the market that is used to help clients acquire a downpayment or closing costs when their credit is good, but cash reserves are low. Essentially, it means that a lender will give you your downpayment in the form of cash at closing.
Here's how it works:
Purchase Price: $100,000
Mortgage Needed: $95,000 (There would be Default Insurance Premium added to it as well)
The bank will then provide the $5,000 needed and your mortgage will still be based on $95,000. However, cash back mortgages are subject to a higher interest rate to reflect the money you have been given at cash back. The best way to think about it is that you are receiving a regular mortgage for 95% of the total purchase of the home and the other 5% is a five year loan that will be payed off in five years. This means that at the conclusion of the 5 Year term you will have paid the off the regular amount of principal and interest and the full cashback will be paid in full as well. Even with a slightly higher payment this will usually make sense, because you are avoiding having to buy when interest rates will be higher later. There are also some variations of this where the cash back can be for a smaller amount, if you have only a partial downpayment as well.